Should You Purchase Another Construction Company For Additional Growth Opportunities?

January 15, 2019

Many of us are looking to grow our construction companies. To do this we need additional people, equipment, and of course projects. Sometimes the simple solution seems we could purchase another construction company and merge it into our company. But is this a good solution? Well, it depends.

I worked for a construction company which was privately owned and almost a family business when I joined them. Within twenty years the company had grown into a multinational public company with revenue of several billion dollars and profits of a hundred plus million dollars. This growth was achieved by a combination of growing the company from within, as well as purchasing other construction companies. However, not all these purchases were successful, and a few even proved very costly. But, some of these purchases provided the company with the right resources and clients to grow, as well as giving us a springboard into other markets and regions. In this growth, our company became a takeover target for another construction company, which fortunately we resisted and we eventually outstripped the size of that company and became far more successful.

So what did we learn from these takeovers, mergers, and acquisitions?

Why are you purchasing the company? Are you sure it’s a cost-effective solution?

It’s important to carefully analyze the reasons for purchasing another construction company. Only purchase a company if it’s going to offer additional opportunities and add to the balance sheet of your company. These opportunities may be because the new company:

Is performing poorly and you believe that you’ll be able to turn the company around and make it profitable again, turning a ‘cheap buy’ into a ‘money maker’. Regrettably, this isn’t always as easy as it seems.

The new poorly performing company often demands lots of management time to turn it around. Management time which is diverted away from doing what they were successfully doing – which was running a good construction company. I’ve often seen the diversion of management to fix and embed the new company then adversely impact the performance and reputation of the original company. Know who will devote time to fixing the company and understand that they will be unavailable for other projects within the existing company for several months, and even a couple of years.

You always need to understand why the company was failing and what you’ll do differently to turn the company around. Unfortunately, often failing companies are failing for multiple reasons and often the true reasons for the failure, as well as the full extent of the problems, are hidden and only become apparent after the company has been purchased.

Is working in a different region, maybe another state, and it will help your company expand into this region. Nevertheless, it’s important to first:

Analyze the risks and opportunities of the region.

Understand whether the new company is operating successfully in the region – are there problems that aren’t obvious, or costs which aren’t accounted for?

Check that they are making money.

Understand the reasons for their success – sometimes it may just be a lucky contract or an opportunistic period.

Ensure that there will be further work in the region.

Understand whether the company will provide the appropriate spring-board to expand into the region. Are there other ways to get into the region without spending money on purchasing that company?

Has established relationships with different clients to the ones you normally work with. However, you must understand:

The reasons for these relationships, since they are often built around personal relationships which can be worthless should individuals leave the client’s or contractor’s employ.

Whether the clients will continue to provide work opportunities.

Has expertise in a different field to what your company has. Nevertheless, first check the following:

Is this expertise because of particular individuals employed by the company, and will they remain with the company after the take-over?

Could these individuals, or others with similar expertise, be engaged by your company at a fraction of the cost of purchasing the whole company just to get their knowledge?

Is the whole company expert in this field, or are you purchasing other sections and people which are less useful and may even have to be terminated later at additional costs?

Is the company really an expert and is their reputation with clients as good as you perceive it to be?

Will having expertise in this field really enhance your company’s capabilities and profits and will the purchase of this expertise earn a return on the investment?

Has a large pool of skilled personnel. But first, ascertain:

Whether the personnel will remain with the company. (I’ve generally found that up to half the employees resign and leave the company that’s been bought within a couple of years of the buy-out – unfortunately, it’s often the better ones that leave first).

Are the people as skilled as you think they are?

If it would have been cheaper to attract the skilled people from elsewhere, rather than purchasing the company to get the people?

How many personnel aren’t good and are dead-wood who will need to be made redundant?

The overlap of people and functions between the companies, since it’s invariably necessary to terminate employees when there’s already a person fulfilling that function (this termination process is expensive and causes fear and resentment amongst the new company’s employees – leading to resignations and poor performance).

Has lots of construction equipment. However, it’s necessary to check:

If the equipment can be utilized (remember there’s no choice and you’re paying for all of the equipment whether you can use it or not).

Are the items compatible with the equipment already owned?

Is the equipment of a similar model and make as equipment already owned? Having assorted models and makes of equipment means additional spares have to be kept and maintenance is more difficult.

The condition of the machines and have they been regularly maintained with service histories and records.

Are the warranties in place and still valid (because some may have been invalidated if the equipment hasn’t been serviced correctly or the original manufacturer’s parts haven’t been used).

The condition of wearing parts and tires as there could be a large cost to replace them.

Are spare parts readily available for all the items?

Who owns the equipment – some equipment may be leased or have large outstanding loans?

Would it be cheaper to buy the equipment elsewhere rather than purchasing the company? This will enable you to purchase only the equipment that you need and equipment that matches your existing equipment.

By purchasing the company you may be removing a competitor. But is this:

Going to be a benefit worth the cost?

Not going to result in another contractor taking their place?

Proper due diligence investigation is essential before purchase.

It’s imperative that a proper due diligence is carried out on the new company before purchasing it. This should include reviewing:

Many of the items above.

The financial statements and verifying their accuracy.

All projects and understanding their safety, quality, outstanding payments, what costs and revenues have been declared and whether these are correct, potential project problems, progress measured against the project schedule, forecast cost to completion, resources, suppliers and subcontractors, the status of claims and variations, if the client is happy (review project progress meetings) and the quality of staff.

Prices which have been submitted for projects that may be awarded to the company. Are these prices reasonable and can the projects be completed profitably? You don’t want to be buying loss-making projects!

Operating Procedures.

Their tax affairs.

Outstanding guarantees and warranties.

Labor relations and agreements.

The numbers of personnel, their skills and years of tenure.

Lease and rental agreements.

Money owing on loans, equipment, and other assets.

Conclusion

When purchasing a new construction company it’s important to have a plan in place to ensure that the integration with the existing company happens speedily and efficiently. There will always be lots of uncertainty amongst the new company’s personnel as well as their clients and suppliers. This uncertainty may result in clients taking their business elsewhere, suppliers cutting off deliveries and employees resigning or operating at reduced productivity.

Purchasing another construction company can provide opportunities for rapidly expanding your existing company, providing new sources of revenue, new clients, additional resources and a springboard into new regions. Regrettably, though, these opportunities don’t always materialize. There are often stumbling blocks, hidden costs, skeletons hidden in cupboards and unexpected hazards.

Always be sure that the company is being purchased for the right reasons, then do a thorough and meticulous due diligence review of the company before agreeing on the purchase price. Always be prepared to walk away from the deal if things aren’t as expected. There will always be other opportunities.

Importantly understand that even with the best investigations that there will be failures along the way. Melding two construction companies together, with different people and different operating cultures is never easy and there’s seldom a perfect fit. Also be aware that mergers and acquisitions are time-consuming.

Have you successfully purchased another construction company? What did you learn from the experience? How has it benefited your company?

Author: Paul Netscher

Paul Netscher is an experienced construction professional who managed over 120 projects in 6 countries over 28 years. Paul writes for the ClockShark blog and is the author of five books on construction project management.